Owning and running a family business comes with all sorts of internal and external pressure. From managing clients or customers to staffing and resourcing, suppliers and contractors to trying to keep up with ever expanding regulatory requirements and increased costs – most business owners feel that they are too weighed down to give succession planning serious thought.

Thoughts of exit from business life and succession plans quite often come relatively late and when the time to deal with succession is limited. This has been thrown into sharp relief since the Government’s announcement of significant changes to Inheritance Tax.

Daniel McCracken, Head of Private Client and Wealth Management at MKB Law highlights some of the key issues family business owners should consider and provides an update on the changes to Inheritance Tax coming into effect.

Why should I be concerned about succession planning?

Family businesses in Northern Ireland are a core driver of the local economy making up to 75% of the private sector. The tradition of passing family business from generation to generation has become more complicated in recent years and significant changes to Inheritance Tax are set to add a further tax burden onto business owners seeking to honour that long standing tradition.

Planning how you will pass on your family business to the next generation isn’t an overnight process. It’s crucial that your successors are invested early so they can learn how to run and manage the business after you retire. Starting this planning early has the advantage of letting the next generation learn and upskill before taking on a leading role in the business as well as building rapport with clients and suppliers. It also has the dual advantage of enabling you to plan ahead with your trusted advisors to ensure your succession plans achieve your desired goals. Where there is significant wealth built up in a family business or there are complex corporate structures, the process for transferring it efficiently by using the relevant tax thresholds, allowances and reliefs can often take years.

What are the Inheritance Tax concerns?

Largely, Inheritance Tax is charged on death on: (i) anything you own (whether solely, with another person or in some trusts); (ii) anything you gave away that you continue to benefit from at death; and (iii) anything you gave away in the 7 years before death outside your annual gifting allowances. At present, most unused pensions benefits do not fall within the scope for Inheritance Tax.

In the UK everyone has a Nil Rate Band (“NRB”) they can use either in every 7-year cycle for establishing trusts in your lifetime or to leave with their estate on death. The NRB is the first amount that you can leave which is taxed at 0% – essentially your tax-free allowance. The current NRB is £325,000. As a starting point, anything above that limit would be taxed at 40% at the market value of those assets at death.

Where residential property is left to direct descendants (children, grandchildren, step-children), a person also has a Residential Nil Rate Band (“RNRB”) of up to £175,000 or the value of the residential property (whichever is less). Where a person’s estate is worth more than £2m the RNRB is tapered away until it is lost completely for estate’s valued over £2.35m.

Spouses and civil partners are exempt from Inheritance Tax and the surviving spouse or civil partner also gets to benefit from any allowance which was unused by the first spouse or civil partner. Essentially where spouses or civil partners leave everything to each other, the surviving spouse/civil partner can double their own allowances when the criteria are met.

Between the NRB and the RNRB a married couple or couple in civil partnership can potentially leave up to £1 million before Inheritance Tax becomes an issue and other reliefs should be considered.

What are the Reliefs?

Business Property Relief (“BPR”) allows qualifying business property to be reduced in value by 50% or 100% for Inheritance Tax purposes. Generally, qualifying business property is an interest in a business or an unlisted company which is owned for a period of 2 years or more and which is not wholly or mainly held for investment purposes. For most trading family businesses, relief at 100% is usually achievable.

For the most part, holdings in land will not usually achieve BPR. For those with agri-businesses, agricultural land can instead benefit from Agricultural Property Relief (“APR”) which will usually reduce the agricultural value of the land by 100% to nil. Land with development potential will only attract APR up to the agricultural value and not any added value for the potential development of the land.

BPR and APR are some of the most valuable tax reliefs for business owners and farmers as they allow those assets to pass to the chosen beneficiaries without costing the business or the farm. Where plans have been put in place for this, this ensures business continuity and protects cash flow since the death of a key member of the business will already be a major hurdle to the business’s continued success.

However, the Government has announced a raft of reforms to Inheritance Tax which will complicate how business assets are treated and likely increase tax burdens for those who haven’t engaged in focused succession planning.

What are the changes?

• The NRB and RNRB is frozen until 2030;
• From April 2025, the non-domiciled status was replaced by a residency-based system;
• From April 2026, Business Property Relief and Agricultural Property Relief will be reformed and the 100% relief would be curtailed where the assets are £1 million or more; and
• From April 2027 unused pensions would be brought within scope for Inheritance Tax.

Freezes on Tax Allowances

The freeze on any increase in the NRB or the RNRB allowances will mean that as your assets grow the more of your allowance is used up. Whilst this isn’t an increase in the rate of tax at death or a decrease in any allowance, it means that more estates will be pulled up into the tax bracket to pay Inheritance Tax by the fiscal drag while inflation erodes the real value of the estate since anything outside an exemption, relief or allowance is taxed at 40%. That position is set to be reviewed in 2030. It’s worth noting that the NRB hasn’t been increased since 2009 so fiscal drag has already been affecting estates for some time.

Changes to Tax Residency Status

On 6th April 2025 the new rules about tax residency came into effect. Essentially, the previous position was that if you were domiciled (i.e. the country around which your life is centred) outside of the UK then Inheritance Tax only applied to your UK assets and not on your worldwide assets. If you were domiciled in the UK then Inheritance Tax applied to all your assets wherever they were in the world.

The new regime means that anyone who is tax resident in the UK for 10 out of the 20 years before death will have their worldwide assets subject to Inheritance Tax. This won’t be a big change for most people who have already centred their lives in the UK.

However, many business owners in Northern Ireland do business north and south of the border and may either be from the south or have moved south for business and laid down roots there. Where you have assets in another jurisdiction such as Ireland, they will become subject to UK Inheritance Tax if you have been tax resident in the UK for 10 out of the 20 years before your death. If you do have assets in multiple jurisdictions, its worth looking at your residency status if you’re intending to be tax efficient in your succession planning.

Changes to Agricultural and Business Property Reliefs

A lot has been said about the effect of changes to APR for farmers, but BPR is being treated in the same way. From April 2026 the 100% relief for both APR and BPR will be capped at £1 million per person. This will be a combined allowance where someone has business and agricultural holdings. Anything in excess of the cap which qualifies will instead get 50% relief which in effect means a tax charge of 20%.

Unlike the NRB and RNRB allowances, there is no transfer of any unused £1 million cap to a surviving spouse or civil partner – essentially it will be use it or lose it. These are substantial changes which will affect many successful business owners where their business value exceeds £1 million.

Last month, the Government published its responses to the consultation process on how these changes will affect trusts and published draft legislation and a policy paper. Largely the position since the announcement in October 2024 remains unchanged. One change is that the £1 million allowance will be indexed to the Consumer Price Index from 2030 onwards to allow it to try to keep pace with inflation in due course. No transfer on death of unused relief from one spouse/civil partner to the other will apply and the ‘use it or lose it’ position remains the case.

Where a person has created trusts over qualifying assets in their lifetime, the £1 million allowance is to be applied chronologically to any trusts established and then to the death estate. Like the current NRB allowance, this will refresh every 7 years. Proposals were made by consultees to allow an election of the allowance to afford greater flexibility but this has been rejected.

A big question on many business owners’ minds has centred on how the tax will be paid. For most assets on death the Inheritance Tax is due within 6 months of death after which point it will incur interest with penalties starting at 12 months. Some illiquid assets are afforded an instalment option which allows the Personal Representatives to pay the tax over 10 years. In its policy paper the Government has confirmed that the interest free 10-year instalment plan will be expanded to apply to all qualifying business and agricultural property so the Personal Representatives do not need to come up with a lump sum of the tax due.

However, the instalments have to come from somewhere and if they come from income generated by the business then the new owners may find they aren’t making enough from the business to meet the tax bill and meet their own bills.

Changes to Pensions

Most pension arrangements are currently outside the scope of Inheritance Tax and there is no limit on the amount that can be accumulated in a pension which then passes to beneficiaries on death. However, from April 2027 most unused lump sums and death benefits due from pension arrangements are set to fall within the scope of Inheritance Tax to meet the Government’s policy objective of curtailing pension use as a means of passing on wealth rather than planning for retirement.

Given the current position on pensions, many business owners may find themselves having built up significant wealth in their pensions having benefited from the tax relief on adding into a pension with the expectation that this will avoid Inheritance Tax.

Not only does this affect the tax bill due but it may also have practical issues for dealing with an estate. In the Government consultation, consultees noted that pensions do not form part of someone’s estate on death (as they are usually held by a pension trustee outside the estate). The responsibility for reporting and paying Inheritance Tax falls on the estate so there will be further liability for Personal Representatives on assets that they don’t have any control over. Proposals were put forward that Pension Scheme Administrators would be responsible for the reporting and payment of tax but this has been rejected in favour of the current position where the Personal Representatives remain liable.

What steps should you be taking?

With the significant reforms to Inheritance Tax, succession planning has become even more critical to business owners or those with high net worth. Whilst a knee-jerk reaction to the changes isn’t prudent, engaging with your trusted advisors over your succession plans is crucial not only to ensure tax efficiency but business continuity as well.

Having advisors in appropriate disciplines like tax, accountancy, financial advice and law means that your advisors can work together to take advantage of planning opportunities to meet your needs and goals.

Whilst the changes are significant, there are still opportunities to make use of spousal exemptions to have more than one £1 million APR/BPR allowance available. Similarly, making use of the 7-year cycle of a renewing allowance could help mitigate some of the liabilities that would otherwise be incurred without planning.

Working with your advisors to come up with a tailored approach to retain control of the business while you’re still working whilst passing wealth to the next generation is possible but it’s important to start early and work out what your plan is for exiting business life.

At MKB Law we regularly work alongside advisors in other disciplines to help craft succession plans and put in place structures both on the corporate side and on the personal side to help you have peace of mind over the continuity of your business.